I’ve always had a passion for business. No matter how much experience I get, there is always more to learn, more to accomplish. The mix of personality, drive and innovation in business leaders mixed with market demand, the economy, competition, government and the world around us makes for a fresh challenge requiring fresh approaches every day. What fun!
From 1884 to 2006, I was CEO and co-founder of Bentley Publishing Group, a privately held firm based in Walnut Creek, Calif. until I founded my mid-market consulting firm, CEO to CEO.
I’ve published extensively on the successful leadership traits of CEOs of mid-market companies, and wrote the book, The Feel of the Deal and soon my newest book, Mighty Midsized Businesses: How Leaders Overcome 7 Silent Growth Killers, due September 16th, 2014.
CEO to CEO is a consulting firm of former chief executives that improves the leadership infrastructure of midsized companies that are pursuing higher performance.
Website: www.ceotoceo.biz E-mail: R.Sher@ceotoceo.biz

Absolutely no one is talking about the need to accurately evaluate performance, to reward the high performers and force the low performers to get better or move out. As a veteran CEO, I found that if you don’t shed low performers and encourage high performers, you’ll lose your best and most creative people.

My experience has been with middle market companies ($10 million to $300 million revenues), which are many-fold smaller than Microsoft. In these companies, I most often see the exact opposite problem that’s purportedly plaguing Microsoft: Employees (including management) aren’t evaluated with sufficient rigor, and low performers are tolerated. These low performers destroy the performance environment by encouraging average performers to slack off. The high performers either leave — they prefer working with other high performers — or become arrogant and hard to manage.

One key to increasing performance is to reduce the range between the lowest and highest performers in a given population. A tight range produces higher performance. For example, Olympic athletes compete to be the best in the world. The range between the gold medal and no medal at the Olympics is very small, and we see amazing performance. This is true in business as well. Much research has been done in this area by Elkiem, a human high performance research firm with which I’m quite familiar.

In a high-performance environment, the lowest performers are made to feel uncomfortable. They get counseling, encouragement, and tough evaluations. This nudges them to perform at higher levels or encourages them to leave. Those who don’t respond well and get fired or quit don’t feel great about their ex-company, and they might write disparaging comments about it. But the company is left with higher average performers and a tighter range.

With the lowest performers gone or improved, new people—who used to be average performers—are now on the low end of the scale, and are encouraged to perform at still higher levels. This will seem harsh to people who don’t want to continuously improve themselves. They should not work for any firm that strives for a high-performance work environment. Likewise, CEOs dedicated to high-performance results should avoid hiring these people.

There are a few caveats. A company that applies too much pressure will lose good people. Further, if the metrics for performance aren’t understood and accepted by all, the environment will suffer badly and great people will leave. The reason is that it’s not clear to them what they must do to be successful. The path to winning becomes political—to make friends with the right people. Performance is bound to suffer.

From the posts I read, the stack ranking at Microsoft is political and not based on valid accepted metrics that define performance. But I’m inclined to fault the measurement system more than stack ranking.

So what can middle market companies learn from Microsoft? What these companies need is a firmer, more formal approach to identifying high and low performers, and must treat each appropriately. Because they are much smaller than Microsoft, these companies typically have only 2-4 layers of management. They have less need for big-company, machine-like systems that are overly rigid.

In the end, a CEO who is doing her job will set the example for her management team: that high performance — not politics — is elemental. In turn, they will have a similar caliber of vice presidents and other managers below them. If management keeps its own house in order, it will greatly increase the odds for building a great performance environment that attracts and keeps the best talent.

In my consulting work, I have some CEOs who like everyone in their leadership team and rarely reprimand or fire poor-performing leaders. In these cases, I will occasionally force a CEO to stack rank his leadership team. It forces critical thinking. It forces inquiry about performance and using evaluation tools like 360-degree performance reviews. It can be quite useful.

In my own company (I was CEO for 23 years), executives would at times want to give equal raises to their whole team. I would often force them to stack rank their team, then based on that, try and justify the pay levels of each person. It forced a harder comparative look, and drove better decision-making. Stack ranking is at its heart, an ordering of items, based on a set of criteria. From what I read, at Microsoft the blame may fall more on the absence of clear, accepted, visible criteria.

Mid-market company leaders must unfailingly evaluate people based on clear criteria. They then must reward the high performers and get the low performers to improve or leave.

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In my experience the problem is not the evaluation itself, but rather, how and why the evaluations are being conducted, or not conducted as the case may be. A problematic issue I see over and over again is the misguided need to identify “potential.” True “A” talent, real leaders, don’t need identifying – they make their presence known through results, not hype. You might be interested in a post entitled: http://www.n2growth.com/blog/the-myth-of-potential

Mike: I love your perspective! Prove the potential through results. Then get promoted! I read your post and enjoyed it. Thank you for commenting. Results, measured for and accounted for are a great antidote to political behaviors inside an organization.

Stack ranking can get difficult, particularly in small teams that emphasize creativity and cooperation.

As an entrepreneur, owner, and manager, though, I think the key benefit of the approach is that it can force one to deal with employees that are merely adequate. Many managers (myself included, at times) find it easier to not remove an employee who will never be a star but who, more or less, gets the job done. When there aren’t enough hours in the day, it can seem simpler to do nothing than have a difficult termination conversation with that marginal performer, and then deal with weeks or months of recruiting, training, etc. while still getting the job done. (And I’ve learned my lesson – just about every time I’ve left a marginal performer in place “temporarily” for convenience reasons, that decision came back to bite me not long after.)

In big companies, I’ve seen these low performers survive for years, often receiving good reviews (because they “need” a raise and a good review is the only way to give them one). Stack ranking, or differentiation, can force a manager to acknowledge the limitations of the least promotable employees and to find a solution, whether it’s training, transfer, or termination. Employed properly, it can be humane and motivating; if used poorly or with favoritism, it can indeed be brutal.

Thank you for that thoughtful reply. Your comment makes me think about the amount of transparency that is advisable when doing stack ranking. My bias is not to share the process too broadly, if at all. It adds a lot of pressure to the whole team if they think about it too much. Of course, poor performers should be already in counseling, and would know that they need to improve performance. But knowing that stack ranking is being used may not be helpful to teamwork and morale. What do you think on this point?

I agree with a lot of the comments made here. It’s important to identify the performance levels: reward the high performers and help the low performers improve (or leave if appropriate). It’s also a good idea to strive for improvement: everywhere. That is what makes it possible to get paid more.

But this is NOT what’s being done at MSFT and other places. People aren’t being helped to improve (you already made an investment when you hired those individuals, right?). Instead they’re being set against each other.

Only a fool would call that productive. Looks to me like we’ve got plenty to spare in our executive suites.

It’s also asinine to think that each and every year you can eliminate 10% of your workforce in favor of new hires and improve overall. Sounds to me like a lot of churning. Read: WASTE.

And lets’ get back to the idea of improvement everywhere: let’s apply the ranking to _everyone_, including the CEO. He can be rated against CEO’s of other companies. And if you don’t measure up … well now here’s your chance to think about how you’d like to be treated should you find yourself having a hard time at your job. Would you like to set some goals and work toward them or be terminated because some damned fool thinks this is best practices? Your call …

CEOs set goals and work toward them all the time and still get terminated. Boards do it to them all the time. If it makes you feel any better, there are many times when the CEO doesn’t get time to grow and learn on the job. The board or the business need results pronto—no time to learn. CEOs are often held to a very high standard, and should be.

Most of the CEOs I know and work with (in the middle market) take their responsibilities seriously, and try to learn what they need before the business requires it. I often help them—I’m a CEO coach.

But you’re right that standards of performance should start at the top—with the CEO, then the c-level team, then the rest of management next. Without leadership walking the talk, they’ll never succeed in developing or retaining a great team.

CEOs also set goals, fall short, and do not get terminated. Steve Ballmer, John Chambers for example. The same crumbs who are forcing these half-a$$ed policies on their employees. It not possible to speak too harshly of such “leaders”. Nobody disputes the need to deal decisively with underperforming employees. I remember a time when the fear of wrongful termination suits kept more than a few bad apples on the payroll. Now it seems we’re terminating employees who are actually doing good work! You can’t make this stuff up. I can’t help wondering what has held the lawyers at bay. No worries: they will find a way. It sure seems like the money paid these “leaders” is not buying much in the line of simple good judgement.

I think there is a difference between ensuring leadership knows the talents of your team and traditional stack ranking. Good managers suffer during stack ranks as they are penalized for raising the bar of the top and dealing with poor performers. In other words, if 30% of my team are top performers, only 10% get the recognition, and if I managed out a poor performer or even worse turned the employee around, I still need to provide a bottom 10%, as managers rarely get to say they have all the top performers and another manager all the bottom. It is extremely stressful during review times for these managers, and can result in the exact behavior it was meant to address ie. only give the top assignments to Jane since I can only give one top slot, and ignore John’s poor performance so I can offer him up in a few months as my bottom 10%. When the rest of the team in the middle finds out where they stand, many lower their work standards just enough so that they are not the bottom. Even worse, in this model your bottom may be a solid achiever who you can count on but doesn’t want / can’t do more, and forcing him/her out actually hurts your team.

A better solution is to ensure the Senior Manager / Director, through regular meetings, is aware of the top performers (via metrics, opportunities) while also periodically asking who is need in coaching and what the action is. The good manager actively promotes the top employees, and leadership then knows who their go-to team is throughout the cycle – there is no need to stack rank yearly. He/she also discusses who is at the bottom and provides regular updates on progress. The poor manager cannot adequately promote their top, and as such loses visibility with leadership. They also do little to nothing to fix their lower performers. Come review time, there is no need for one yearly meeting for all managers to argue their team to leadership – it’s already known. The good manager then gets a higher allocation of compensation budget for disbursement, while the poor manager does not. The poor manager is also dinged in their performance review for failure to properly performance manage. In that model, it is the poor manager who is managed out, as opposed to the unfortunate average performer who happens to be on a strong team. However, it does require more active engagement by leadership and forces them too to make the tough calls on poor performers.

Bingo. That’s the issue within most of the large organization I have been associated with. Your solution gives a brilliant highlights, i how a good manager can raise the bar without being threatened and organization differentiate between poor and average performing manager who has the ability to enhance their performance.

In my earlier organization, it was done with senior management at a function level which supports your solution. I would further like to understand how it can be incorporated at multiple levels (in context of workable process) and how does one manages the average/poor individual contributors (not just managers) who are at 5th/6th level and possibly could miss management’s direct lens.